Investment and
Owner Occupied Loans

his is the ‘benchmark’ variable interest rate for each lender. This home loan is usually flexible, but not competitive as far as interest rates, fees and charges go. The interest rate can rise and fall depending on the economy and bank policy and this will affect repayment. Most major lenders offer “professional pack” discounts (see above) that substantially reduce the interest rate.

A fixed rate home loan is where the interest rate and repayments are fixed or locked in for a set period of time, usually 1-10 years and in some cases longer. After the fixed period ends, the loan will revert to a variable rate. The advantage of a fixed interest rate is having certainty about your required home loan repayments, making budgeting easier. It also protects you from potential interest rate increases.

The disadvantages are a reduction in flexibility i.e. extra repayments, redraw etc, and the fees involved if you break the terms and conditions of the facility. If interest rates fall, you will still be paying your existing repayments as the fixed rate will not change.  It is important to know how much flexibility your facility offers. Most lenders offer to ‘lock in’ the fixed rate at the time of application; however this may incur a fee.  Fixed rate loans rates can sometimes be reduced further if they are part of a pro pack.

These are variable rate home loans with a discounted interest rate for the first 6 to 36 months of the home loan. After the ‘honeymoon’ period, the interest rate will automatically roll onto the standard variable. Some lenders may fix or cap the rate during the honeymoon period. The obvious advantage is the lower interest rate which reduces your repayments, and gives you the opportunity if you choose to pay more of the principal as quickly as possible. The disadvantages are that once the ‘honeymoon’ period is over you are usually left with a less than competitive interest rate, and there may be higher exit fees during the honeymoon period. They are generally not available in conjunction with a pro pack.

It is important to know the exit fees and switch fees so you are aware of the costs to secure a better interest rate once the honeymoon period is over.

Whilst not really a loan as such, an offset account that is linked to a home loan can reduce either the interest paid or the term of the loan. This is because when the bank calculates the interest payable, it deducts any balance in your offset account from the loan balance. Therefore if you had, say, a loan for $300,000 and an offset account balance of $20,000, you only pay interest on the difference – being $280,000. Mathematically, an offset/loan account combination is the same as a line of credit, but may have certain tax benefits that you should discuss with your accountant.

A line of credit is an approved limit of money you can borrow secured by a residential property (investment or owner occupied). It is a very flexible loan and usually gives you the choice of paying interest only or principal and interest – and in some cases allowing interest to capitalise until you reach your credit limit. Therefore you may be able to use the funds available IN the line of credit to pay the interest charged ON your line of credit.

There are two types of ‘line of credit’ and it is important to know which one you have. The first has a standard 30 year term with the line of credit option being available for 1-10 years depending on the lender, after which the lender will require principal and interest repayments.  The second is what is often referred to as an ‘evergreen’ line of credit in that it has no actual term, and as long as you are conducting the facility according to the lenders terms and conditions you will only ever have to pay interest on the outstanding balance.

A line of credit facility is popular with property investors and those who are financially responsible and can stick to a budget. Whether you are building a property portfolio and like the convenience of having your loan approved and waiting, or are renovating and only having to pay interest on the funds you have drawn down as your project progresses, or you’re simply wanting to pool all of your income into your line of credit in an effort to pay your home loan off faster – this facility suits a variety of circumstances, but is definitely not for those who lose track of their finances quickly.  A line of credit can usually be part of a pro pack to reduce the cost beyond the quoted rate.

This allows you to make part of your home loan variable, and part fixed or part principal and interest and part interest only.  When splitting your home loan between variable and fixed it gives you the advantages of fixing into a rate and having the comfort of knowing that portion of your home loan will not change should interest rates go up, while still having the full flexibility on the variable portion. Of course your variable portion is still vulnerable to interest rate changes. If interest rates fall, your fixed portion repayments will not.

Again it is important to check the interest rate your fixed portion will revert to. Also check fees and charges associated with splitting your home loan. Check also for rate lock fees on the fixed portion of your home loan.

The construction home loan is similar to a residential home loan except the property used as security is yet to be built. The loan is drawn down in progress payments (usually 5 or 6) in accordance with the stages of construction.  After construction is complete you may have the option to switch to a more competitive product. Some lenders charge ‘progress fees’ to cover the valuation at each stage.  Pro pack interest rates are generally available for construction loans.

Bridging finance is a short term loan that covers the gap between the purchase of a new property and the sale of the old property. Lender policies on bridging finance vary significantly so it is important to know exactly what is required under the credit contract, for example, loan servicing requirements, loan term, and allowing for interest capitalisation.  There is a certain amount of risk involved in bridging finance, so it is important to allow for worst case scenarios.

These facilities have been designed for self employed individuals who do not have their current income and taxation details available for the home loan application. Low doc loans were quite popular in the past, however recent changes to legislation have restricted their use to the extent that more financial evidence is now required before an approval will be given.  The majority of lenders will only lend up to 80% of the property value under low doc policy. Some lenders may go higher, but pricing is “rate for risk” and therefore the repayments will be significantly increased.

Lenders mortgage insurance may also be payable when you borrow over 60%, however there are some lenders who will cover the LMI premium for you – so it is important to know who will and who won’t and to consider this when choosing a home loan. Lo Doc lending is definitely an area where advice from an experienced broker is required.

These facilities are for people who for a range of circumstances have a poor credit rating. Anything from not paying a phone bill to bankruptcy can be noted on your credit rating for lenders to see.  Non traditional lenders provide products for people with an adverse credit history. The interest rates vary significantly depending on the level of risk the lender sees in funding your loan.

A reverse mortgage or equity release mortgage has been designed for home owners over 60 to access equity in their home to help fund their retirement without having to sell their home.  Products vary according to flexibility and the amount you can borrow, as well as how the funds are paid to you – so make sure the lender you choose suits YOUR needs. Generally the lender will ask the borrower to seek independent financial and legal advice before agreeing to a reverse mortgage loan.